Amicus Curiae Brief — North Carolina Department of Revenue, Petitioner v. The Kimberley Rice Kaestner 1992 Family Trust

No. 18-457

In the

Supreme Court of the United States

NORTH CAROLINA DEPARTMENT OF REVENUE,

Petitioner,

v.

THE KIMBERLEY RICE KAESTNER

1992 FAMILY TRUST,

Respondent.

On Writ of Certiorari to the Supreme

Court of North Carolina

BRIEF OF AMICUS CURIAE THE NEW

YORK STATE BAR ASSOCIATION IN

SUPPORT OF RESPONDENT

Michael Miller

President

Robert M. Harper*

A ngelo M. Grasso

Jeffery H. Sheetz

Lois Bladykas

New York State Bar A ssociation

One Elk Street

Albany, New York 12207

(518) 463-3200

rharper@farrellfritz.com

* Counsel of Record

287465

Counsel for Amicus Curiae

A

(800) 274-3321 • (800) 359-6859

i

TABLE OF CONTENTS

Page

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . i

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . iii

INTEREST OF AMICUS CURIAE . . . . . . . . . . . . . . . . 1

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . 2

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

I.

A Trust Is Separate and Distinct from

Its Beneficiaries, and Should Be Treated

as Such for Purposes of State Income

Taxation of Undistributed Trust Income . . . . . . 3

II. Due Process Does Not Permit a State to

Tax Undistributed Trust Income Based

Solely on the Residence of a Discretionary

Trust Beneficiary in the State . . . . . . . . . . . . . . . 8

A. A Discretionary Trust Beneficiary’s

Residence In a St at e Does Not

Justify That State’s Ta xation of

Undistributed Trust Income That Is

Earned In Another State . . . . . . . . . . . . . . 10

B. The Analysis of the Court Below Is Neither

Formalistic Nor Rigid and Comports

With the Due Process Clause . . . . . . . . . . . 16

ii

Table of Contents

Page

C. The Court Below Did Not Create

A Tax Shelter . . . . . . . . . . . . . . . . . . . . . . . . 18

III. North Carolina’s Tax Violates the Commerce

Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

A. The Four Factors For the Dormant

Commerce Clause Analysis Cannot

Be Met . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

B. In t he A lt er nat ive, t he Matt er

Should be Remanded for Commerce

Clause Consideration . . . . . . . . . . . . . . . . . . 26

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

iii

TABLE OF CITED AUTHORITIES

Page

Cases

Abell v. Tait,

30 F.2d 54 (4th Cir. 1929), cert. denied,

279 U.S. 849 (1929) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Allied-Signal, Inc. v. Dir., Div. of Taxation,

504 U.S. 768 (1992) . . . . . . . . . . . . . . . . . . . . . . . . 13, 16

Andrews v. Commonwealth of Pennsylvania,

196 A.3d 1090 (Pa. Commw. Ct. 2018) . . . . . . . . . . . 22

Blue v. Dep’t of Treasury,

462 N.W.2d 762 (Mich. Ct. App. 1990) . . . . . . . . . . . 13

Brooke v. City of Norfolk,

277 U.S. 27 (1928) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Brown v. Spohr,

73 N.E. 14 (N.Y. 1904) . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Chase Manhattan Bank v. Gavin,

733 A.2d 782 (Conn. 1999) . . . . . . . . . . . . . . . . . . . 14-15

Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977) . . . . . . . . . . . . . . . . . . . . . . . passim

Comptroller of Maryland Treasury v. Wynne,

135 S. Ct. 1787 (2015) . . . . . . . . . . . . . . . . . . . 23, 24, 26

iv

Cited Authorities

Page

Container Corp. of America v.

Franchise Tax Bd.,

463 U.S. 159 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

District of Columbia v. Chase Manhattan Bank,

689 A.2d 539 (D.C. 1997) . . . . . . . . . . . . . . . . . . . 14, 15

F.W. Woolworth Co. v. New Mexico,

458 U.S. 354 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Fielding v. Comm’r of Revenue,

916 N.W.2d 323 (Minn. 2018), petition for cert.

pending, No. 18-664 (filed Nov. 15, 2018) . . . . . . . . 9-10

Greenough v. Tax Assessors of City of Newport,

331 U.S. 486 (1947) . . . . . . . . . . . . . . . . . . . . . . . . 14, 18

Hans Rees’ Sons v. North Carolina,

283 U.S. 123 (1931) . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Hanson v. Denckla,

357 U.S. 235 (1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

In re Harmon,

900 N.Y.S.2d 761 (N.Y. App. Div. 2010) . . . . . . . . . . . . 6

In re Swift,

727 S.W.2d 880 (Mo. 1987) . . . . . . . . . . . . . . . . . . . . . 17

J.D. Adams Mfg. Co. v. Storen,

304 U.S. 307 (1938) . . . . . . . . . . . . . . . . . . . . . . . . 24, 25

v

Cited Authorities

Page

Kimberly Rice Kaestner Family Trust v.

North Carolina Dep’t of Revenue,

12-CVS-8740, 2015 WL 1880607 (N.C. Super.

Ct. Apr. 23, 2015), aff’d, 789 S.E.2d 645 (N.C.

Ct. App. 2016), aff’d, 814 S.E.2d 43

(N.C. 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 21, 22

Lineback by Hutchens v. Stout,

339 S.E.2d 103 (N.C. Ct. App. 1986) . . . . . . . . . . . . . . 6

Linn v. Ill. Dep’t of Revenue,

2 N.E.3d 1203 (Ill. App. Ct. 2013) . . . . . . . . . . . . . . . . 9

Linser v. Office of Attorney Gen.,

672 N.W.2d 643 (N.D. 2003) . . . . . . . . . . . . . . . . . . . . 12

McCulloch v. Franchise Tax Bd.,

390 P.2d 412 (Cal. 1964) . . . . . . . . . . . . . . . . . . . . . . . 15

Mercantile-Safe Deposit & Tr. Co. v. Murphy,

242 N.Y.S.2d 26 (N.Y. App. Div. 1963), aff’d,

203 N.E.2d 490 (N.Y. 1964) . . . . . . . . . . . . . . . . . . . . 11

Merchants’ Loan & Tr. Co. v. Smietanka,

255 U.S. 509 (1921) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Miller Brothers Co. v. Maryland,

347 U.S. 340 (1954) . . . . . . . . . . . . . . . . . . . . . . . . . 8, 22

vi

Cited Authorities

Page

Noel v. Liberty Bank of Ark.,

No. 3:10-CV-00107, 2012 WL 13027498

(E.D. Ark. Nov. 27, 2012) . . . . . . . . . . . . . . . . . . . . . . . 5

Oklahoma Tax Com’n v. Jefferson Lines, Inc.,

514 U.S. 175 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . 23, 25

Oklahoma Tax Comm’n v. Chicksaw Nation,

515 U.S. 450 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Pike v. Bruce Church, Inc.,

397 U.S. 137 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Potter v. Taxation Div. Dir.,

5 N.J. Tax. 399 (N.J. Tax Ct. 1983) . . . . . . . . . . . . . . 12

Quill Corp. v. North Dakota,

504 U.S. 298 (1992), over r uled in par t

b y S o u t h D a k o t a v . Wa y f a i r , In c . ,

138 S. Ct. 2080 (2018) . . . . . . . . . . . . . . . . . . 8, 9, 11, 16

Residuary Tr. A v. Dir., Div. of Taxation,

27 N.J. Tax 68 (N.J. Tax Ct. 2013), aff’d,

28 N.J. Tax 541 (N.J. App. Div. 2015) . . . . . . . . . . . . . 9

Safe Deposit & Tr. Co. v. Virginia,

280 U.S. 83 (1929) . . . . . . . . . . . . . . . . . . . . . . . . . 10, 14

South Dakota v. Wayfair,

138 S. Ct. 2080 (2018) . . . . . . . . . . . . . . . . . . . . . passim

vii

Cited Authorities

Page

Stephens v. Tipton,

268 P. 1014 (Or. 1928) . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Montgomery Cnty., Alabama,

845 F. Supp. 820 (M.D. Ala. 1993) . . . . . . . . . . . . . . . 10

Western R.R. Co. v. Nolan,

48 N.Y. 513 (N.Y. 1872) . . . . . . . . . . . . . . . . . . . . . . . . . 5

Westfall v. Dir. of Revenue,

812 S.W.2d 513 (Mo. 1991) . . . . . . . . . . . . . . . . . . . . . . 17

Statutes and Other Authorities

U.S. Const. amend. XIV, § 1 . . . . . . . . . . . . . . . . . . . . . 2, 8

Ark. Code Ann. § 26-51-203(a)(1) . . . . . . . . . . . . . . . . . . 19

Cal. Rev. & Tax Code § 17742(a) . . . . . . . . . . . . . . . . . . . 18

Cal. Rev. & Tax Code § 17745(b) . . . . . . . . . . . . . . . . . . . 19

Ga. St. § 48-7-22(a)(1)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Mich. Comp. Laws § 206.110 . . . . . . . . . . . . . . . . . . . . . . 19

N.C. Gen. St. § 105-160.2 . . . . . . . . . . . . . . . . . . . . . . . . . 18

N.Y. E.P.T.L. § 7-1.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

viii

Cited Authorities

Page

N.Y. Tax Law § 612(b)(40) . . . . . . . . . . . . . . . . . . . . . . . . 19

Restatement (Second) of Trusts § 2 . . . . . . . . . . . . . . . . . 3

Restatement (Second) of Trusts § 59, cmt. b . . . . . . . . . 4

Restatement (Second) of Trusts § 128, cmt. d. . . . . . . . 12

Tenn. Code Ann. § 67-2-110(a) . . . . . . . . . . . . . . . . . . . . . 18

Wis. Stat. § 700.16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

George T. Bogert, Trusts § 1 (6th ed. 1987) . . . . . . 4, 5, 6

Kevin R. Ghassomian, Eliminate State Tax On

Trust Income: A Comprehensive Update on

Planning with Incomplete Gift Non-Grantor

Trusts, 39 ACTEC L.J. 317 (Winter 2013) . . . . . . . 18

Richard W. Nenno, Minimizing or Eliminating

State Incom e Ta xes on Tr usts, Koren

Est at e , Ta x , a nd Pe r s on a l F i n a nc i a l

Planning Update (August 2018 ed.) . . . . . . . . . . . . . 23

Tenn. Dep’t of Rev., 2018 Guidance for Tennessee’s

Hall Income Tax Return (July 12, 2017) . . . . . . . . . 18

1

INTEREST OF AMICUS CURIAE

The New York State Bar Association (“NYSBA”) is

the largest voluntary state bar association in the United

States, with more than 72,000 members.1 NYSBA’s

members live and practice in every town, city and county

in the State of New York, and its membership also includes

non-resident lawyers around the nation and throughout

the world.

NYSBA has 26 sections dedicated to discrete

areas of the law, including the Trusts and Estates Law

Section, which consists of more than 3,000 members.

With the assistance of its sections, as well as more than

60 committees, NYSBA drafts and supports legislation,

sponsors conferences, seminars and institutes, and makes

policy recommendations to bodies including the United

States Congress, the New York State Legislature, and

the New York State Office of Court Administration.

NYSBA previously has submitted amicus curiae

briefs to the Supreme Court of the United States.

NYSBA respectfully submits this brief in support of

respondent, the Kimberley Rice Kaestner 1992 Family

Trust (“Respondent”), and to assist the Court concerning

the practical and policy implications of this case for the

1. NYSBA respectfully submits this brief, pursuant to the

blanket-consent letters that the parties filed with the Court.

Pursuant to Rule 37.6 of the Court’s Rules, amicus affirms that

no counsel for a party authored this brief, in whole or in part;

that no such counsel or party has made a monetary contribution

intended to fund the preparation or submission of this brief; and

that no person other than amicus and its counsel made such a

monetary contribution.

2

trusts and estates bar, as well as the grantors, trustees,

and beneficiaries of trusts.

SUMMARY OF ARGUMENT

NYSBA respectfully submits this amicus curiae

brief in support of Respondent. The court below correctly

found that an out-of-state trust that did no business in

North Carolina, had no assets in North Carolina, and

distributed no income to anyone in North Carolina had

no connection or substantial nexus with that state, which

unconstitutionally taxed Respondent on its undistributed

income. This accords with generally accepted trusts and

estates law, which draws a distinction between a trust’s

trustee and its beneficiaries, and does not treat a trust as

a vehicle to serve at the beneficiaries’ behest.

With that in mind, NYSBA respectfully submits that

North Carolina’s argument that a beneficiary is “the

central figure” in a trust is a mischaracterization of wellsettled trusts and estates law. Pet. Br. at 2. Contrary to

North Carolina’s contention, the central figure in a trust

is the trustee, who is the taxpayer, the fiduciary, and the

owner of legal title in the trust’s property. This distinction

is all the more apparent here, where the trustee has

absolute discretion to make (or not make) distributions,

and the beneficiaries’ rights are contingent upon that

absolute discretion.

Given the nature and purpose of trusts, North

Carolina’s tax impermissibly violates the Due Process

Clause of the Fourteenth Amendment to the United

States Constitution, as well as the Commerce Clause

contained in the Constitution, by taxing trustees who

3

have no relationship with North Carolina. The tax violates

the Due Process Clause because it does not require that

a trustee have the requisite “minimum connection” with

the state, nor does it require the existence of a rational

relationship between North Carolina and the income it

seeks to tax. As to the Commerce Clause, the tax fails the

four-part test set forth in Complete Auto Transit, Inc. v.

Brady, 430 U.S. 274 (1977), as there is no nexus between

Respondent and North Carolina, and the tax is neither

internally consistent nor externally consistent. Hence,

the decision below should be affirmed.

ARGUMENT

I.

A Trust Is Separate and Distinct from Its

Beneficiaries, and Should Be Treated as Such for

Purposes of State Income Taxation of Undistributed

Trust Income.

To justify the state income tax that it assessed

against Respondent, North Carolina effectively argues

that no legal distinction exists between a trust and its

discretionary beneficiaries. North Carolina’s contention

f latly contradicts the governing trusts and estates

law, which this Court should apply in rejecting North

Carolina’s position.

A trust “is a fiduciary relationship with respect to

property, subjecting [the person] by whom the title to

property is held, to equitable duties to deal with the

property for the benefit of another person, which arises

as a result of a manifestation of an intention to create it.”

Restatement (Second) of Trusts § 2. The trust relationship

has three essential requirements: (1) “an expression

4

of intent that property be held, at least in part, for the

benefit of one other than the settlor;” (2) “at least one

beneficiary for whom the property is to be administered

by the trustee;” and (3) “an interest in property which is

in existence or is ascertainable and is to be held for the

benefit of the beneficiary.” George T. Bogert, Trusts § 1

(6th ed. 1987) (“Bogert on Trusts”); Brown v. Spohr, 73

N.E. 14 (N.Y. 1904).

A trust may be created for any lawful purpose,

N.Y. E.P.T.L. § 7-1.4, but the most common reason for

establishing a trust is to separate the control of trust

assets from its beneficiaries. Restatement (Second) of

Trusts § 59, cmt. b. As a result, legal title to trust property

vests in the trustee, not in a beneficiary. Stephens v.

Tipton, 268 P. 1014, 1015 (Or. 1928). The bifurcation of

legal and beneficial title to trust assets is fundamental

to the very existence of a trust; for if legal and beneficial

title are not separated (such that legal and beneficial title

to trust property rest in the same individual or entity),

no trust arises. Id.

Beneficiaries are not “owners” of trust assets in the

common sense of the word. On the contrary, because a

trustee is a fiduciary, and fiduciaries and beneficiaries

are separate entities, Abell v. Tait, 30 F.2d 54, 55 (4th

Cir. 1929) (citing, e.g., Merchants’ Loan & Tr. Co. v.

Smietanka, 255 U.S. 509 (1921)), cert. denied, 279 U.S.

849 (1929), a trust beneficiary’s interest in trust assets is

“non-possessory.” Bogert on Trusts, § 38.

A trustee has legal ownership of trust assets, at least

until trust distributions are made. The trustee’s legal

ownership of trust assets typically carries with it the

5

power to sell trust assets, to invest trust property, and

to collect the income earned on trust property. Bogert on

Trusts, § 88. A beneficiary has no such powers. In fact,

a beneficiary’s rights with respect to trust property are

derivative, not direct, and are subject to the possessory

rights that a trustee has as to trust assets. Western

R.R. Co. v. Nolan, 48 N.Y. 513, 518-19 (N.Y. 1872). For

example, in order to assert a cause of action on behalf of

a trust, the trustee, not a beneficiary, must commence an

action, even though that action ultimately may inure to

the beneficiary’s benefit. Noel v. Liberty Bank of Ark.,

No. 3:10-CV-00107, 2012 WL 13027498, at *8 (E.D. Ark.

Nov. 27, 2012).

Given the foregoing, and the nature of the trusteebeneficiary relationship, it logically follows that a

beneficiary’s right to distribution of trust assets is subject

to limitations. It is governed by the terms of the trust

instrument, pursuant to which the trust is created. Bogert

on Trusts, § 38. As memorialized in the trust instrument,

the settlor’s intentions are entitled to great latitude in

fixing beneficiaries’ interests in a trust, and not all trust

beneficiaries are created equal. The trust instrument may

direct that a beneficiary’s equitable interest in trust assets

is subject to a definite period of trust administration, or

that the trust’s administration shall continue indefinitely.

Id.; Wis. Stat. § 700.16. Likewise, the trust instrument may

provide that a trust beneficiary’s interest is contingent

or vested; is in trust income or principal; is subject to a

condition precedent or subsequent; or is possessory or

non-possessory. Bogert on Trusts, § 38.

A settlor may direct that a trustee make certain

distributions to specific beneficiaries (whose rights

6

are “mandatory”), or may “authorize the trustee to do

or refrain from doing a certain act, or use his [or her]

judgment as to when or how a power should be used.”

Bogert on Trusts, § 89. Put another way, a settlor may

vest the trustee with partial or absolute discretion to

make trust distributions. Id. In general, a trustee’s

exercise of discretion in making trust distributions (or

refraining from doing so) will only be disturbed, by courts

or otherwise, upon a showing that the trustee did not act

in good faith. Id.; In re Harmon, 900 N.Y.S.2d 761, 764

(N.Y. App. Div. 2010). The trustee’s exercise of discretion

in distributing trust assets is entitled to tremendous

deference, regardless of the wishes of trust beneficiaries

(and, oftentimes, much to beneficiaries’ chagrin). Id.

Further demonstrating the dichotomy that exists

between trusts and their beneficiaries is the fact that

courts typically will not require trustees to exercise their

discretion to make trust distributions in a manner that

would allow for beneficiaries’ creditors and assignees

to gain access to trust assets. Lineback by Hutchens v.

Stout, 339 S.E.2d 103, 106 (N.C. Ct. App. 1986). Indeed,

courts have explained that, under a “discretionary trust,

the trustee may withhold the trust income and principal

altogether from the beneficiary and the beneficiary, as

well as the creditors and assignees of the beneficiary,

cannot compel the trustee to pay over any part of the

trust funds.” Id.

In order to justify the unconstitutional state income

tax that it seeks to levy against Respondent, North

Carolina argues that a beneficiary is “the central figure

in a trust.” Pet. Br. at 2. North Carolina’s contention

overlooks well-settled trust law, which establishes that

7

three figures are essential to a trust: the settlor, the

trustee, and the beneficiaries. The trust’s beneficiaries

are not, as North Carolina argues, more important to the

trustee-beneficiary relationship than the trustee.

In fact, for the purpose of determining the legal

ownership of assets that are held in trust, the beneficiaries

are less important to the trust relationship than the trustee

is. During the relevant tax years, the beneficiaries’ ability

to receive income distributions was subject to the trustee’s

absolute discretion. Joint Appendix [“App.”] 45-47. As he

was permitted to do under the terms of Respondent trust,

the trustee did not exercise his discretion to distribute

income to the beneficiaries during the 2005, 2006, 2007,

or 2008 tax years. Id. at 12.

Legal title to trust assets, including its income,

remained with the trustee, rather than the trust’s

beneficiaries. Because legal title to the trust’s income

remained with the trustee, and the beneficiaries had

neither access to, nor control over the income, the trust

and its beneficiaries are separate and distinct from each

other, and should be treated as such for purposes of state

income taxation of undistributed trust income.

Accordingly, it strains credulity to dispute that the

trust was separate and distinct from its beneficiaries, and

North Carolina’s contentions to the contrary are devoid

of merit.

8

II. Due Process Does Not Permit a State to Tax

Undistributed Trust Income Based Solely on the

Residence of a Discretionary Trust Beneficiary in

the State.

The Question Presented addresses the extent to

which the Due Process Clause permits North Carolina

to tax undistributed income earned by a trust that is

administered, and maintains all of its assets, books, and

records, outside of North Carolina, based solely upon

the North Carolina residence of discretionary trust

beneficiaries to whom no trust distributions were made

during the relevant tax years. As the Due Process Clause

does not permit such state income taxation, the Court

should affirm the decision of the court below.

Under the Due Process Clause, “[n]o State shall

. . . deprive any person of life, liberty, or property, without

due process of law[.]” U.S. Const. amend. XIV, § 1. The

Court has interpreted the Due Process Clause to limit

states’ authority to tax, requiring a state to satisfy two

jurisdictional prerequisites in order to impose tax on a

prospective taxpayer. Quill Corp. v. North Dakota, 504

U.S. 298, 306 (1992), overruled in part by South Dakota

v. Wayfair, Inc., 138 S. Ct. 2080, 2099 (2018). First, a state

must show a “definite link, some minimum connection,

between a state and the person, property or transaction

it seeks to tax”. Miller Bros. Co. v. Maryland, 347 U.S.

340, 344-45 (1954). Second, the state must establish the

existence of a rational relationship between income that

the state seeks to tax and “values connected with the

taxing [s]tate.” Quill, 504 U.S. at 306; F.W. Woolworth

Co. v. New Mexico, 458 U.S. 354, 365 (1982). Absent those

two jurisdictional prerequisites, a state cannot tax a

9

prospective taxpayer in a manner that passes Due Process

Clause-based muster.

Although a state may, at times, tax a prospective

taxpayer that does not have a physical presence within the

state’s borders in a constitutionally-permissible manner,

the state’s authority to do so is subject to limitations.

Oklahoma Tax Comm’n v. Chicksaw Nation, 515 U.S. 450,

463 n.11 (1995). One such limitation is the requirement

that the prospective taxpayer “purposefully avail . . . itself

of the benefits of an economic market in the forum

[s]tate.” Quill, 504 U.S. at 307. The underlying rationale

is that a prospective taxpayer’s purposeful availment puts

the prospective taxpayer on notice that its “activity may

subject [it] to the jurisdiction of a” state in which it does

not have a physical presence. Id. at 308. The foregoing

principles apply regardless of whether (a) the prospective

taxpayer is an individual, a business entity, or a trust, or

(b) the tax concerns income or sales tax.

In order for a state to tax income earned by a trust

in a manner that comports with the Due Process Clause,

the state must establish that the trust has a “definite

link” and “minimum connection” to the state, and that

a rational relationship exists between the trust income

that the state seeks to tax and the values that the state

provides. Linn v. Ill. Dep’t of Revenue, 2 N.E.3d 1203,

1208 (Ill. App. Ct. 2013); Residuary Tr. A v. Dir., Div.

of Taxation, 27 N.J. Tax 68, 72-76 (N.J. Tax Ct. 2013),

aff’d, 28 N.J. Tax 541 (N.J. App. Div. 2015) (affirming on

the basis of statutory construction, rather than the Due

Process Clause). Failing such a showing, the Due Process

Clause will bar state income taxation of a trust. Linn,

2 N.E.3d at 1208; Fielding v. Comm’r of Revenue, 916

10

N.W.2d 323, 329 (Minn. 2018), petition for cert. pending,

No. 18-664 (filed Nov. 15, 2018).

A.

A Discretionary Trust Beneficiary’s Residence

In a State Does Not Justify That State’s

Taxation of Undistributed Trust Income That

Is Earned In Another State.

A state’s taxation of undistributed income earned by

a trust that is administered in another state, based solely

on the presence of a trust beneficiary within the taxing

state, is hardly a novel concept. Brooke v. City of Norfolk,

277 U.S. 27, 28-29 (1928). In fact, for the past 80 years,

this Court has rejected states’ efforts to tax undistributed

trust income earned in another state where the taxing

state’s sole connection to the trust is the residence of a

trust beneficiary in that state. Id.; Safe Deposit & Tr. Co.

v. Virginia, 280 U.S. 83, 92 (1929). The Court has reasoned

that a trust and its beneficiaries, though related, are not

one and the same. Safe Deposit, 280 U.S. at 92 (explaining

that, where the trustee of a trust owned legal title to trust

securities in Maryland, and none of the trust beneficiaries

located in Virginia had a “present right to their enjoyment

or power to remove them,” the “securities did not and could

not follow any person domiciled in Virginia”); cf. United

States v. One Parcel of Prop. Located at Route 27, Box

411 (Patterson Road), Montgomery Cnty., Alabama, 845

F. Supp. 820, 823-24 (M.D. Ala. 1993) (in rejecting the

federal government’s argument that a trust beneficiary’s

knowledge should be imputed to the trust’s trustee in a

forfeiture proceeding concerning the beneficiary, the court

noted that a trustee’s ownership of trust property “is

independent of the beneficiary,” and oftentimes requires

the trustee to protect “the beneficiary from his or her own

improvidence or incapacity”).

11

Relying upon this Court’s well-reasoned precedent,

other courts (including state courts) have held that,

under the Due Process Clause, the presence of a trust

beneficiary in a particular state, without more, is

insufficient to establish minimum contacts to justify

the state’s taxation of undistributed trust income that

is earned in another state. Mercantile-Safe Deposit &

Tr. Co. v. Murphy, 242 N.Y.S.2d 26, 28 (N.Y. App. Div.

1963) (“We find no merit . . . in their thesis that since

the resident beneficiaries of the trust could be taxed on

income distributed the nonresident trustee can be taxed

on income accumulated.”), aff’d, 203 N.E.2d 490, 491 (N.Y.

1964). For example, in Mercantile-Safe Deposit & Trust

Co. v. Murphy, New York sought to tax the undistributed

income earned by a trust administered in Maryland, by

a corporate trustee based in Maryland, solely because

a trust beneficiary resided in New York. Id. Citing to

Safe Deposit, New York’s Appellate Division and Court

of Appeals rejected the state’s argument, and held that

regardless of the beneficiary’s residence in New York, the

tax violated the Due Process Clause. Id.2

A similar result is warranted when a state’s only

connection to a trust is a discretionary trust beneficiary’s

2. The holding the New York courts reached in MercantileSafe Deposit & Trust Co. is consistent with the one that this

Court articulated in Hanson v. Denckla. In Hanson, this Court

found that the presence of trust beneficiaries in Florida did not

confer on that state jurisdiction over the trustee of a trust who

had no other Florida connections. Hanson v. Denckla, 357 U.S.

235, 254 (1958). While North Carolina argues that Hanson has

no application here because personal jurisdiction in litigation and

tax jurisdiction are distinct concepts, this Court has recognized

that adjudicative jurisdiction and tax jurisdiction are comparable

with each other. Quill, 504 U.S. at 307-08.

12

residence within the state. Under such circumstances,

insufficient contacts exist between the state and the trust

to justify the state’s taxation of the trust’s undistributed

income. Potter v. Taxation Div. Dir., 5 N.J. Tax. 399, 405

(N.J. Tax Ct. 1983). This is because the discretionary

trust beneficiary has “no right to the undistributed trust

income.” Id. Absent an exercise of discretion by the

trustee, the discretionary trust beneficiary cannot access

such undistributed trust income, direct that it be paid to

(or for the benefit of) the beneficiary, or otherwise exercise

control over it. Restatement (Second) of Trusts § 128, cmt.

d.; but cf. Linser v. Office of Attorney Gen., 672 N.W.2d

643, 646 (N.D. 2003) (explaining that a discretionary

beneficiary’s interests in a trust are too remote to warrant

treating the trust’s undistributed assets as belonging to

the beneficiary).

Recognizing that the presence of discretionary

trust beneficiaries within North Carolina was the only

connection that the trust had to that state, the court

below correctly concluded that the trust lacked sufficient

minimum contacts with North Carolina to justify its tax

on all of the income the trust earned during the 2005 to

2008 tax years. Kimberly Rice Kaestner 1992 Family

Tr. v. North Carolina, 814 S.E.2d 43, 51 (N.C. 2018). The

trustee resided in Connecticut. App. 40-41. The trustee

maintained the trust’s books and records in New York. Id.

at 41. All of the trust’s assets were in Massachusetts. Id.

The trustee did not make distributions to any beneficiaries

that were located in North Carolina, earn income within

that state, or otherwise transact business in North

Carolina. Id. at 41-42.

13

Simply put, since neither the trust nor the trustee

engaged in any affairs in North Carolina, it cannot be said

that Respondent purposefully availed itself of any benefits

associated with North Carolina. What is more, because

the trust’s discretionary beneficiaries did not have a right

to access or control the trust’s assets or income, and those

beneficiaries did not receive any trust distributions during

the relevant tax years, the mere presence of Respondent’s

discretionary beneficiaries in North Carolina during those

years is insufficient to establish the requisite minimum

contacts to justify that state’s tax on Respondent’s

undistributed trust income during the relevant tax years.

Putting aside, for argument’s sake only, that the

mere presence of a discretionary beneficiary of a trust

in a particular state is insufficient to establish minimum

contacts to justify that state’s taxation of undistributed

trust income that is earned outside of the state, such

undistributed trust income also bears no relationship,

rational or otherwise, to the values that the state in which

the discretionary trust beneficiary resides provides to

the trust. Blue v. Dep’t of Treasury, 462 N.W.2d 762,

764 (Mich. Ct. App. 1990). Since none of the trustee, the

trust’s assets or the trust’s income is located within North

Carolina, the state provides “no ongoing protection or

benefit to the trust.” Id. The state is essentially a stranger

to the trust, regardless of the state’s relationship to a

discretionary trust beneficiary. Cf. Allied-Signal, Inc. v.

Dir., Div. of Taxation, 504 U.S. 768, 778 (1992) (noting

that, to satisfy the Due Process Clause, “there must be a

connection to the activity itself, rather than a connection

only to the actor the [s]tate seeks to tax”). Consequently,

the Due Process Clause does not permit North Carolina

to tax the trust on undistributed income that the trust

earned outside of North Carolina’s borders.

14

North Carolina’s reliance upon Greenough v. Tax

Assessors of City of Newport for the proposition that

“a trust constituent’s residency in a state connects the

trust to the state” is misplaced. Pet. Br. at 30. Although

Greenough established that a state could constitutionally

tax income earned by a trust based upon a trustee’s

presence within that state, Greenough does not support

North Carolina’s argument that a beneficiary’s presence

within the state provides the same jurisdictional basis.

Greenough v. Tax Assessors of City of Newport, 331 U.S.

486, 493-96 (1947).

North Carolina’s claim that Greenough is at odds with

Safe Deposit is incorrect. First, it is worthy of note that

the Court cited to Safe Deposit in Greenough, recognizing

that the two cases involved different jurisdictional

issues. Greenough, 331 U.S. at 496-97. On the one hand,

the Court answered the jurisdictional question in Safe

Deposit – whether the presence of trust beneficiaries in

Virginia permitted that state to tax the trust’s assets,

even though the trustee, and the trust’s assets, were

located in Maryland – in the negative. Safe Deposit, 280

U.S. at 89-94. On the other hand, however, the Court

answered the jurisdictional question in Greenough –

whether the presence of a trust’s trustee in Rhode Island

authorized that state to tax the trust’s intangible assets –

affirmatively. Greenough, 331 U.S. at 488-98. Collectively,

they provide that the presence within a state of a trust’s

trustee, but not a trust’s beneficiary, is sufficient to

establish minimum contacts with the state. Hence, Safe

Deposit and Greenough are consistent with each other.

Finally, Petitioner’s reference to District of Columbia

v. Chase Manhattan Bank, Chase Manhattan Bank

15

v. Gavin, and McCulloch v. Franchise Tax Board is

misplaced. All but one of the trusts in question in District

of Columbia and Gavin were testamentary trusts, which

were created pursuant to decrees that issued from courts

in the jurisdictions that imposed tax. District of Columbia

v. Chase Manhattan Bank, 689 A.2d 539, 545 (D.C. 1997);

Chase Manhattan Bank v. Gavin, 733 A.2d 782, 795-99

(Conn. 1999). Although Gavin also concerned an inter

vivos trust, the beneficiary thereof – whose presence in

Connecticut was found to justify that state’s taxation of the

trust’s undistributed income – had more significant vested

rights in the Gavin inter vivos trust (including the right to

receive the trust’s corpus at age forty-five, and to direct

how the trust’s corpus would be distributed, if she died

before attaining forty-five years of age) than Respondent’s

discretionary beneficiaries did in the trust established

for their benefit. Gavin, 733 A.2d at 802. In McCulloch,

California taxed the California-resident beneficiary

of a Missouri testamentary trust for income earned

during the last five years of the trust’s administration,

at a point when the trust already had terminated and its

assets had been distributed to the beneficiary, which is

readily-distinguishable from the present matter (in which

Respondent’s assets remained in trust during, and after,

the relevant tax years). McCulloch v. Franchise Tax Bd.,

390 P.2d 412, 414-21 (Cal. 1964).

In light of the foregoing, the Due Process Clause

does not permit a state to tax the undistributed income

that a trust earns in another state, based solely upon the

presence of a discretionary trust beneficiary within the

taxing state. The court below correctly concluded as much

in ruling for Respondent.

16

B. The Analysis of the Court Below Is Neither

Formalistic Nor Rigid and Comports With the

Due Process Clause.

Since deciding International Shoe Co. v. Washington,

the Court has eschewed formalistic Due Process Clause

tests that “focused on a [party’s] ‘presence’ within a

[s]tate in favor of a more flexible inquiry into whether [the

party’s] contacts with [a state] made it reasonable, in the

context of our federal system of Government,” to be taxed

by the state. Quill, 504 U.S. at 307. Regardless of that

flexibility, however, the Court has declined to abandon “the

requirement that, in the case of a tax on activity, there

must be a connection to the activity itself . . . ” AlliedSignal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778

(1992). The Court has recognized that the Due Process

Clause requires a connection to the activity that is taxed,

not merely “to the actor [that] the [s]tate seeks to tax.” Id.

North Carolina and certain amici assert that the

North Carolina Supreme Court’s holding was overly

formalistic and rigid, in a manner that contravenes this

Court’s Due Process Clause precedents. Pet. Br. at 2122; Br. for Minnesota and Nineteen Other States and

the District of Columbia as Amicus Curiae Supporting

Petitioner (hereinafter, the “States Amicus Br.”) at 3-6.

However, that argument fails because the income tax

that North Carolina seeks to impose upon the trust’s

undistributed income bears no connection to activities

that took place, or income earned, within North Carolina’s

borders. In effect, North Carolina impermissibly seeks to

tax the trust based upon a connection not to the trust or

the trustee, but rather to its beneficiaries, whose rights

to access trust assets during the relevant tax years were

subject to the trustee’s absolute discretion. App. 42.

17

Minnesota, nineteen other states, and the District of

Columbia advocate for the Court to adopt the Missouri

Supreme Court’s six-pronged test for determining

whether a state can tax income earned by a trust. States

Amicus Br. at 4. The six factors enumerated by the

Missouri Supreme Court are: (1) “the domicile of the

settlor”; (2) “the state in which the trust is created”; (3)

“the location of the trust property”; (4) “the domicile of the

beneficiaries”; (5) “the domicile of the trustees”; and (6)

“the location of the administration of the trust.” Westfall v.

Dir. of Revenue, 812 S.W.2d 513, 514 (Mo. 1991). Under that

test, when only one or two of the six factors are satisfied,

the Due Process Clause cannot be met. In re Swift, 727

S.W.2d 880, 882 (Mo. 1987) (finding that Missouri could

not impose income tax against a trust, even though the

trust’s settlor was domiciled in that state, and the trust

was created there).

The test for which amicus advocates would not

justify reversal here. Without more, the mere presence

of a discretionary trust beneficiary in a particular

state is insufficient to satisfy the Due Process Clause’s

requirement that a state have minimum contacts with a

trust before taxing the trust’s undistributed income. The

presence of a trust beneficiary in a state is neither the

dispositive factor that North Carolina claims it to be, nor

one that warrants reversal here.

Contrary to the claims of North Carolina and certain

amici, the North Carolina Supreme Court did not apply

an antiquated, formalistic, or rigid Due Process Clause

test in this matter. On the contrary, the court below

properly recognized that North Carolina’s efforts to tax

undistributed trust income based solely upon the presence

of discretionary trust beneficiaries within its borders

18

did not satisfy the Due Process Clause’s requirement for

minimum contacts.

C.

The Court Below Did Not Create A Tax Shelter.

The states have adopted divergent approaches for

taxing trust income. Seven states (Alaska, Florida,

Nevada, South Dakota, Texas, Washington, and Wyoming)

do not tax trust income at all. Kevin R. Ghassomian,

Eliminate State Tax On Trust Income: A Comprehensive

Update on Planning with Incomplete Gift Non-Grantor

Trusts, 39 ACTEC L.J. 317, 322 (Winter 2013). Although

the remaining forty-three states and the District of

Columbia do tax trust income, those jurisdictions apply

different criteria in taxing income accumulated by trusts.

Only four states (California, Georgia, North Carolina,

and Tennessee) tax income earned by trusts based upon

the residence of a trust beneficiary within their borders.

Cal. Rev. & Tax Code § 17742(a); Ga. St. § 48-7-22(a)(1)(c);

N.C. Gen. St. § 105-160.2.; Tenn. Code Ann. § 67-2-110(a).

Among the states in that small minority, Tennessee has

repealed its state income tax, which will be fully phased

out effective January 1, 2021. Tenn. Dep’t of Rev., 2018

Guidance for Tennessee’s Hall Income Tax Return (July

12, 2017).

While the states are free to enact tax legislation

of their choosing, that power is subject to limitations.

Greenough, 331 U.S. at 493-95 (“But our question here

is whether or not a provision of the Constitution forbids

the tax. Neither the expediency of the levy nor its

economic effect on the economy of the taxing state is for

our consideration.”). At the very least, the states must

19

comport with the Due Process Clause in enacting taxation

legislation, which North Carolina failed to do here.

The Due Process Clause provides states with a wide

array of options that do not raise constitutional concerns.

Those options include: (1) taxing trust income that is

derived from property and activity that takes place within

a state; and (2) imposing tax on undistributed trust income

earned by a trustee who is located in a state. Mich. Comp.

Laws § 206.110; Ark. Code Ann. § 26-51-203(a)(1).

Yet another constitutionally-permissible option is

available to states. States may tax accumulated trust

income at the time that it is distributed to beneficiaries

who are located within their borders, regardless of where

the income is earned. N.Y. Tax Law § 612(b)(40); Cal. Rev.

& Tax Code § 17745(b). When doing so, states receive

the benefit of taxing resident trust beneficiaries, who

receive trust distributions, for the accumulated income

that the trusts earn during the years before distributions

occur. Regardless of the contacts (or lack thereof) that

the states have to trusts that are administered outside

of their borders, states possess the minimum required

contacts with trust beneficiaries who reside in the states

and can tax such trust beneficiaries on accumulated trust

income that is distributed to them without violating the

Due Process Clause.

In light of the alternatives that are available to the

states, it strains credulity to suggest that the analysis

of the court below creates a tax shelter. Instead, as the

North Carolina Supreme Court correctly recognized, a

state can tax trust income, so long as the state satisfies

the Due Process Clause’s minimum contacts-based test,

20

which can be met by establishing that the trust’s income

arose from property or activities that occurred within the

state, the trust’s trustee was located in the state, or the

trust’s income was distributed to trust beneficiaries who

resided within the state. Absent such a minimal showing,

a state’s taxation of trust income violates the Due Process

Clause.

The Court’s Commerce Clause-based analysis in South

Dakota v. Wayfair, Inc. does not compel a contrary result.

In Wayfair, the Court rejected the efforts of businesses

that maintained no physical presence in particular states,

but sold their goods and services to consumers located in

those states via the internet, to avoid paying any sales tax

to those states. In stark contrast to Wayfair, none of the

parties to this proceeding argues that undistributed trust

income is absolutely exempt from state income taxation in

the absence of a physical presence of a trust within a state.

Rather, to the extent that a state’s only connection

with an out-of-state trust is a discretionary beneficiary’s

residence within the state, the state must await the

beneficiary’s receipt of trust distributions in order to tax

trust income. Such a result fairly balances the state’s

interest in maximizing its tax revenues and the Due

Process Clause’s minimum-contacts analysis, by which

all states are bound.

In light of the foregoing, North Carolina’s tax on

Respondent during the 2005 to 2008 tax years, which

was predicated upon the residence of Respondent’s

discretionary trust beneficiaries in that state, violates the

Due Process Clause. The Court should, therefore, affirm

the North Carolina Supreme Court’s decision.

21

III. North Carolina’s Tax Violates the Commerce

Clause.

Although the Question Presented concerns whether

North Carolina’s tax violates the Due Process Clause,

Respondent argued below that the tax also violates the

Commerce Clause. Kimberly Rice Kaestner Family Trust

v. North Carolina Dep’t of Revenue, 12-CVS-8740, 2015

WL 1880607 (N.C. Super. Ct. Apr. 23, 2015), aff’d, 789

S.E.2d 645 (N.C. Ct. App. 2016), aff’d, 814 S.E.2d 43 (N.C.

2018). While the North Carolina Business Court ruled

that the law violated both the Due Process Clause and the

Commerce Clause, North Carolina’s Court of Appeals and

Supreme Court only ruled that the statute violated the

Due Process Clause. Id., 814 S.E.2d at 47. Should the Court

consider North Carolina’s tax vis-à-vis the Commerce

Clause, it should find that it is unconstitutional, or in the

alternative, remand the matter.

A.

The Four Factors For the Dormant Commerce

Clause Analysis Cannot Be Met.

A state tax will survive scrutiny under the Dormant

Commerce Clause so long as it: “(1) applies to an activity

with a substantial nexus with the taxing State, (2) is fairly

apportioned, (3) does not discriminate against interstate

commerce, and (4) is fairly related to the services the

State provides.” South Dakota v. Wayfair, 138 S. Ct. 2080,

2091 (2018) (citing Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977)). 3 An analysis of the tax under the

3. In finding that the tax ran afoul of the Commerce Clause,

the North Carolina Business Court held that the tax did not satisfy

the first or fourth prong, and did not address the other two prongs.

22

Complete Auto Transit test shows that North Carolina’s

tax does not fulfill any of these requirements, much less

all of them.

The substantial nexus requirement commands that

there be “some definite link, some minimum connection,

between a state and the person, property or transaction it

seeks to tax.” Miller Brothers Co. v. Maryland, 347 U.S.

340, 344-45 (1954). For example, in the wake of Wayfair,

Pennsylvania’s intermediate appellate court rejected a

Commerce Clause challenge to a Pennsylvania personal

income tax upon non-resident taxpayers because the

underlying entity derived its income from real property

owned in Pennsylvania, which created a substantial

nexus with the state. Andrews v. Commonwealth of

Pennsylvania, 196 A.3d 1090, 1098 (Pa. Commw. Ct. 2018).

The operative activity – Respondent accumulating

undistributed income – and the taxpayer (the trustee)

did not create a nexus with North Carolina, much less

a substantial nexus. The trustee did not live or work in

North Carolina, none of the income was earned in North

Carolina, and the trust did not own any assets in North

Carolina. Nor was a cent distributed from the trust to

anyone in North Carolina. The presence of discretionary

beneficiaries in the State of North Carolina was incidental

to the taxpayer’s activities.

Kimberly Rice Kaestner Family Trust, 2015 WL 1880607, at

*9. Specifically, the Business Court held that the discretionary

beneficiaries’ presence in North Carolina was “some contact” but

hardly a “substantial nexus.” Likewise, it found the taxpayer (the

trustee) had no presence within the state.

23

Wayfair does not change this analysis. Wayfair

dispensed with the physical presence requirement,

dubbing it “artificial, anachronistic . . . unsound and

incorrect.” Wayfair, 138 S. Ct. at 2099. But this does not

alter the outcome, as the state still must show that the

tax is applied to an activity with a substantial nexus with

the taxing state and that the taxpayer availed itself of

the “substantial privilege” of conducting business in the

jurisdiction. Wayfair, 138 S. Ct. at 2099. This is not the

case here, as North Carolina’s tax is designed to capture

all income earned by a trustee, regardless of whether

the trustee used or profited from any of North Carolina’s

services.4

Nor is the tax fairly apportioned. This prong of the

Complete Auto Transit test serves to “ensure that each

[s]tate taxes only its fair share of an interstate transaction.”

Oklahoma Tax Com’n v. Jefferson Lines, Inc., 514 U.S.

175, 184 (1995). Doing so requires analyzing whether the

tax is both internally consistent and externally consistent.

Internal consistency is achieved “when the imposition

of a tax identical to the one in question by every other

[s]tate would add no burden to interstate commerce that

intrastate commerce would not also bear.” Jefferson

Lines, Inc., 514 U.S. at 185. This Court described utility

of this test three years ago in Comptroller of Maryland

Treasury v. Wynne:

4. For this reason, tax practitioners and commentators have

speculated that Wayfair would have a minimal impact on state

taxation of trusts. Richard W. Nenno, Minimizing or Eliminating

State Income Taxes on Trusts, Koren Estate, Tax, and Personal

Financial Planning Update (August 2018 ed.).

24

By hypothetically assuming that every State

has the same tax structure, the internal

consistency test allows courts to isolate the

effect of a defendant [s]tate’s tax scheme. This

is a virtue of the test because it allows courts

to distinguish between (1) tax schemes that

inherently discriminate against interstate

commerce without regard to the tax policies of

other [s]tates, and (2) tax schemes that create

disparate incentives to engage in interstate

commerce (and sometimes result in double

taxation) only as a result of the interaction

of two different but nondiscriminatory and

internally consistent schemes. The first

category of taxes is typically unconstitutional;

the second is not.

Comptroller of Maryland Treasury v. Wynne, 135 S. Ct.

1787, 1802 (2015) (internal citations omitted).

If imposed nationwide, the North Carolina tax would

discriminate against interstate commerce, as it would

create double taxation upon any trust where the trustee

resided in a state that taxed trust income, and a trust

beneficiary, intentionally or not, resided in a different

state. 5 In some instances, this would be unavoidable. As

an illustration, consider a testamentary trust where the

trustee had absolute discretion over distributing trust

income, and a minor beneficiary resided in another state,

and since she was a minor, could not relocate. Under the

North Carolina law, the trustee would be subjected to

5. Subjecting interstate commerce “to the risk of a double tax

burden to which intrastate commerce is not exposed” is forbidden

by the Commerce Clause. J.D. Adams Mfg. Co. v. Storen, 304 U.S.

307, 311 (1938).

25

double taxation, and would be without recourse, as neither

the trustee nor the beneficiary could relocate.6

This scheme would also create a sea change in trusts

and estates practice for inter vivos trusts, as every time

a beneficiary relocated to another state, grantors and

trustees would be compelled to create a new trust (or

decant a trust into a new trust) to avoid double taxation.

Arguably, a trustee would be breaching its fiduciary duty

if the trustee did not create a new trust (or decant).

The tax also fails to be externally consistent, which

seeks “to discover whether a [s]tate’s tax reaches beyond

that portion of value that is fairly attributable to economic

activity within the taxing [s]tate.” Jefferson Lines,

Inc., 514 U.S. at 185. As none of Respondent’s activity

occurred within North Carolina, the tax reaches beyond

its permissible scope.7 Additionally, as noted above, a

blanket application of North Carolina’s law exposes the

taxpayer (the trustee) to multiple taxation if the trustee is

also paying income tax to the state in which she resides. 8

6. This is why the tax also fails the third prong of Wayfair

and Complete Auto Transit, as it is plainly discriminates against

interstate commerce; here, there are a trustee and a trust

beneficiary in different states.

7. Similarly, the tax fails the fourth prong of Wayfair and

Complete Auto Transit, which requires that the tax bear some

relation to the services provided by North Carolina. The services

that North Carolina and its amici claim the state is providing

(such as public education) are to the beneficiary, not the taxpayer.

8. “The threat of real multiple taxation . . . may indicate a

state’s impermissible overreaching.” Jefferson Lines, 514 U.S.

at 185; see also J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307, 311

(1938).

26

B. In the Alternative, the Matter Should be

Remanded for Commerce Clause Consideration.

In the event the Court reverses on Due Process

grounds and does not hold that North Carolina’s tax is

unconstitutional under the Dormant Commerce Clause, it

should remand for further proceedings to develop a record

concerning whether the tax violates the Commerce Clause.

For example, a tax will not be externally consistent when

the taxpayer demonstrates “by clear and cogent evidence

that the income attributed to the [s]tate is in fact out of

all appropriate proportions to the business transacted in

that [s]tate.” 9 Container Corp. of America v. Franchise

Tax Bd., 463 U.S. 159, 170 (1983) (citing Hans Rees’ Sons

v. North Carolina, 283 U.S. 123 (1931)). The parties should

be permitted to develop a record to ascertain whether

this was the case.

Additional findings of fact would also be necessary

to ascertain if North Carolina’s tax poses an undue

burden and violates the balancing test set forth Pike v.

Bruce Church, Inc., 397 U.S. 137, 142 (1970). Indeed, this

Court noted in Wayfair that Pike is one of several other

aspects of Commerce Clause jurisprudence that can be

used to ascertain a statute’s constitutionality. Wayfair,

138 S. Ct. at 2098-99. The same is true as to whether

North Carolina’s tax impermissibly results in out-of-state

taxpayers being subjected to double-taxation, whereas a

domestic trust would not be. See Wynne, 135 S. Ct. at 1822.

9. Container Corp. concerned an apportionment formula

between two states. While this is not the case here, the overarching

principle applies.

27

CONCLUSION

For the foregoing reasons, NYSBA respectfully

submits that the decision below should be affirmed.

Respectfully submitted,

Michael Miller

President

Robert M. Harper*

A ngelo M. Grasso

Jeffery H. Sheetz

Lois Bladykas

New York State Bar A ssociation

One Elk Street

Albany, New York 12207

(518) 463-3200

rharper@farrellfritz.com

* Counsel of Record

Counsel for Amicus Curiae